Winding Up (1)

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Winding up of a company is the method of putting an end to the life of a company.

In the words of
Professor Gower - winding up is a process whereby its life is ended and its assets/property are
administered for the benefit of its creditors and members. An administrator, called liquidator, is
appointed and he takes control of the company assets, pays debts and finally distributes any surplus
among the members in accordance with their respective rights. In the words of Pennington winding
up is the procedure by which the affairs and management of company’s assets are taken from the
directors, its properties are managed by a liquidator, and its debts and liabilities are discharged out of
the proceeds of realisation and any surplus of assets remaining is returned to its members or
shareholders. At the end of the winding up of the Company it will have no assets or liabilities, and it
will take the formal step of dissolution.

How dissolution is different from winding up


Winding up is the proceeding by which a company is dissolved. However, the company is not
dissolved immediately at the commencement of winding up. Its corporate status and powers
continue. Winding up precedes dissolution. On dissolution, the company ceases to exist as a separate
entity and becomes incapable of keeping property, suing or being sued.

Prior to November 15, 2016, the term “winding-up” was neither defined under the Companies Act,
1956 (“1956 Act”) nor under the Companies Act, 2013 (“2013 Act”). Section 255 of the Insolvency and
Bankruptcy Code, 2016 (“the Code”) has been notified with effect from November 15, 2016 and by
virtue of Section 255, the 2013 Act stands amended in accordance with Schedule XI of the Code. The
aforesaid Schedule XI now defines the term “winding up” by introducing a new Section 2(94A) to the
2013 Act as “winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.”
The other significant changes introduced by the Code to the 2013 Act include removal of provisions of
‘voluntary winding up’ and winding up on the ground of ‘inability to pay debts’ from the 2013 Act as
the proceedings relating to these now find place under the Code.

Position prior to November 15, 2016

Prior to the Insolvency and Bankruptcy Code, there were two forms of winding up, first being the
voluntary winding up from sections 304 to 323 of Companies Act and the second being winding up by
the tribunal. The first has been deleted with the passing of the code and presently, compulsory
winding up, i.e. winding up but tribunal is the existing method under the 2013 Act.

Position after November 15, 2016

Winding up on inability to pay debts

Section 271(1)(a) of 2013 Act which dealt with the winding up by Tribunal on account of inability to
pay debts has been omitted by Section 255 of the Code. The same is now dealt with in accordance
with the provisions of Sections 7 to 9 of the Code being initiation of corporate insolvency resolution
process by financial and operational creditors.

Ground for Winding Up by the National Company Law Tribunal (Compulsory Winding Up)

A company may be wound up at an order of the tribunal and is also called compulsory winding up.
Winding up by the Tribunal, may be conducted if any of the circumstances mentioned in Section 271
are fulfilled. The Tribunal can order for the winding up of the company on an application by any of
the persons who are authorised under Section 272. The circumstances under which a company can be
wound up by Tribunal have been clearly enlisted in Section 271 as follows
(a) if the company, by passing of special resolution has resolved that the company should be wound
up by the tribunal

(b) if the company has acted against the sovereignty and integrity of India, security of state, friendly
relations with foreign states, public order, decency or morality

(c) conducting affairs in a fraudulent manner

(d) the company has made a default in filing of financial statements or annual returns with the
Registrar for immediately preceding five financial years; and

(e) on just and equitable grounds in the opinion of the Tribunal - the company would be wound up if
the tribunal is of the opinion that it is just and equitable and that is should no longer remain in
function

Winding Up by Special Resolution (Section 271)

The company by special resolution can decide that it would be wound up by the Tribunal. The
tribunal is, however, not bound to order winding up simply because the company has so resolved. The
power is discretionary and may not be exercised when winding up would be opposed to the public or
company's interests.

Company acting against the interests of sovereignty and integrity of India or of the security of
the State or even of the friendly relations with foreign States(271)

The grounds like acting against the interests of sovereignty and integrity of India or of the security of
the State or even of the friendly relations with foreign States are due to the geo-political scene and its
contours, the remaining grounds of public order, decency and morality, do not appear to belong to
the same strain. The other grounds remain a point of contention as the corporations if engage in
public indecency there are regulatory agencies which should be governing them.

Company Affairs conducted in fraudulent and unlawful manner

The Tribunal is of opinion that the affairs of the company have been conducted in a fraudulent
manner or the company was formed for fraudulent or unlawful purpose^ or persons concerned
information on management of its affairs have been guilty of fraud, misfeasance or misconduc in
those connections and that it is proper that the company be wound up. This Clause can be activated
by an application by theRegistrar or by any other person authorised by the Central Government by
notification. Any person authorized by the Central Government or the Registrar can apply to the
Tribunal for winding up proceedings. The Tribunal may order winding up on grounds such as

● The affairs and management of the company is being conducted in a fraudulent manner;
● The company was formed for unlawful or fraudulent purpose; or
● The persons concerned in the formation of the company or management of its affairs have
been guilty of fraud, misfeasance or misconduct in connection therewith.

Company has made a default in filing with the Registrar its financial statements:

Section 271(d) provides a ground of winding up of a company in cases where it defaults in filing of the
annual financial statements or annual returns. It is an indispensable attribute to ensure that
non-accountability and indiscipline in running the management of the company is not rewarded and
Government companies are no exceptions.

If default is made in respect of five consecutive financial years, the clause of winding up can be
invoked. There can be default in either financial statements or annual return. Thus, if annual return
has been filed for five consecutive financial years but financial statements not filed regularly, this is
applicable. The converse is also applicable. The crux and the primal test is that there should have
been a default in either of two cases for consecutive five financial years. Further emphasis has to be
on ‘immediately preceding five consecutive’ years.

Just and Equitable

The Tribunal may also order for the winding up of a company if it is of the view that the company
should be wound up for justice and equity. This gives the Tribunal a very wide discretionary power to
order winding up whenever it appears to be desirable. In exercising its power on this ground, the
Tribunal shall give due weightage to the interest of the company, its employees, creditors and
shareholders and the interest of the general public. This is a completely separate and independent
ground for a winding up order. For this to be applicable, it is not pertinent that the circumstances
should be corresponding to those which justify an order on one of the six grounds. "For a long period
ejusdem generis dominated interpretations of the just and equitable provision. But the rule has been
entirely abandoned and the words are to be treated as conferring a discretionary power which is of
the widest character and the Tribunal are left to work out for themselves the principles on which such
orders should be granted." Theremust be a really strong ground for liquidating a company. Moreover,
theTribunal may refuse to make an order of winding up,if it is of the opinion that some other remedy
is available to the petitioner and he is acting unreasonably in seeking to have the company wound up,
instead of pursuing that other remedy. The relief is like a last resort when the other remedies are not
efficacious enough to protect the general interests of the company. The role of the tribunal discretion
is to consider all the affected interests and not merely those of creditors.

It is not desirable nor possible to categorise facts that render it just and equitable to wind up a
company. But the circumstances in which the courts have in the past dissolved companies on this
ground can be resolved into general categories. The judiciary over the years have wound up many
companies and organisations on this ground as it is in general public interest and equity.

● Impasse/Deadlock: When there is a hold-up in the administration of a company, in the


opinion of the court it is just and equitable to wind up the company. The well-known
illustration is Yenidje Tobacco Co Ltd, re
● Loss of Substratum: Secondly, it is just and equitable to wind up a company when its main
object has failed to materialise or it has lost its substratum. When the company has neglected
to emerge the main objects of the company. The imperative outline here is the instance of
German Date Coffee Co, where a company was framed to manufacture coffee from dates
under a patent which was to be allowed by the Government of Germany and allowed different
licenses. The German patent was not allowed and the company set different and distinct
licenses. In any case, on the appeal of an investor, it was held that the substratum of the
company had fizzled, and it was difficult to complete the articles for which it was framed;
and, thus, it was just and equitable for the company to be wound up.
○ In Seth Mohan Lai v Grain Chambers Ltd, Shah J (later CJ) of the Supreme Court
observed: The substratum of a company can be said to have disappeared only when
the object for which it was incorporated has substantially failed, or when it is
impossible to carry on the business of the company except at a loss, or the existing
and possible assets are insufficient to meet the existing liabilities. In that case owing
to a long drawn out litigation the business of a company had come to a standstill and
a part of its business was banned by legislation, ShahJ (laterCJ) held that "we cannot
on that ground direct that the company be wound up. The company could always
restart business with assets it possessed.
● Losses: Thirdly, it is considered just and equitable to wind up a company when it cannot carry
on business except at losses. It will be needless, indeed, for a company to carry on business
when there is no hope of achieving the object of trading at a profit. But a mere apprehension
on the part of some shareholders that the assets of the company will be frittered away and
that loss instead of gain will result has been held to be no ground. The Bombay High Court
saw in the instance of Shah Steamship Navigation Co, that the Court won’t be justified in
making a winding up arrangement just on the ground that the company has made losses; and
is likely to assist losses.
● Oppression of Minority: ourthly, it is just and equitable to wind up a company where the
principal shareholders have adopted an aggressive or oppressive or squeezing policy towards
the minority. The decision of the Madras High Court in R Sabapathi Rao v Sabapathi Press
Ltd,is an illustration in point. The court observed: Where the directors of a company were
able to exercise a dominating influence on the management of the company and the
managing director was able to outvote the minority of the shareholders and retain the profits
of the business between members of the family and there were several complaints that the
shareholders did not receive a copy of the balance-sheet, nor was the auditor's report read at
the general meeting, dividends were not regularly paid and the rate was diminishing, that
constituted sufficient ground for winding up.
● Fraudulent Purpose: It is just and equitable to wind up a company if it has been conceived
and brought forth in fraud or for illegal purposes. In Universal Mutual Aid and Poor Houses
Assn v. A. Thoppa Naidu the Madras High Court Observed, where the main object of a
company is the conduct of a lottery, the mere fact that some of its objects were philanthropic
will not prevent the company from being ordered to be wound up as being one formed for an
illegal purpose.
● Incorporated or quasi-partnership.—lt has been observed that "there is little in common
between the giant corporation and the family or one-man company. To apply the same legal
requirements to such different organisations is productive of inconvenience and injustice. In
order to avoid such "inconvenience and injustice" the Act treats them differently in several
respects. But even in matters in which the Act treats them alike, the courts have had to
distinguish them. One such matter is the interpretation of the "just and equitable" clause in
reference to the winding up of a small private company. The principle that seems to emerge
from a long line of cases culminating in the House of Lords' decision in Ebrahimi v
Westbourne Galleries Ltd, is that where a private company is in essence or substance a
partnership, it may be ordered to be wound up under the just and equitable clause as
interpreted in accordance with the partnership principles. Yenidje Tobacco CoLtd,re, is itself
an application of the partnership principles, for the company in that case was ordered to be
wound up not merely because of the deadlock between the two member-directors, but
because they had forfeited mutual confidence beyond repair.
● Public interest—Winding up can also be ordered under this section when public interest
demands it.
● Existence of alternative remedy.—The remedy of winding up is a remedy of last resort. It
may not be allowed where an equally effective alternative remedy is available. In M Mohan
Babu v Heritage FoodsIndia Ltd, (2002), allegations of misuse of funds, fraudulent
transactions, removal of a director under a forged resignation, failure to supply essential
documents to shareholders, increase in remuneration of directors without general body
approval, illegal allotments of shares, could have been taken care of by a petition under
Section241 against mismanagement of the com pany's affairs. A petition for winding up was
not entertained.
● Open interest is likewise another vital ground, based on which the court can arrange the
winding up of the company.

Voluntary winding up

The provisions of voluntary winding up provided under the 2013 Act presently stands omitted due to
the notification of Section 255 of the Code. However, these provisions now fall within the purview of
Section 59 of the Code which deals with the voluntary liquidation of corporate persons – this Section
is yet to be notified.
Therefore, in view of non-notification of the provisions of voluntary liquidation under the Code, the
question which arises is regarding provisions which will be applicable for voluntary winding up of
companies and the manner in which the same will be dealt with.

The answer to the above can be derived from Section 468(3) of the 2013 Act which provides that with
respect to winding up, any rules framed by the Hon’ble Supreme Court at any time before the
commencement of 2013 Act shall continue to be in force till the time new rules are framed to that
effect by the Central Government and any reference to the High Court in those rules shall be
construed as the reference to the Tribunal.

The Tribunal shall not have the authority to entertain applications with respect to voluntary winding
up till the notification of provisions of voluntary winding up under the Code. Therefore, till the time
such provisions are notified and corresponding Rules are prescribed by the Central Government, the
procedure laid down under the Companies (Court) Rules, 1959 (“Court Rules”), being the rules framed
by Hon’ble Supreme Court, will be applicable and consequently to the extent Court Rules refer to the
provisions of 1956 Act, such provisions will be applicable to the applications of voluntary winding up.
Therefore, as on date, all the applications or petitions pertaining to the voluntary winding up shall
continue to be made to the High Court of competent jurisdiction.

Petitioners for Winding up of Company

According to Section 272 by the Companies Act, 2013 the following individuals have the authority to
file for a compulsory winding up procedure under Companies Act.

Company as Petitioner (272(a)):

The Company may present a petition for Compulsory Winding Up if a special resolution has been
passed to that effect.

Contributory or contributories as Petitioners (272(b)):

A contributory shall be entitled to present the petition only if the shares were originally allotted to
him; or he has held his shares for at least 6 months during the 18 months immediately preceding the
commencement of winding up; or the shares have been devolved on him by reason of the death of a
member. A contributory shall be entitled to present a petition for the winding up of a company,
notwithstanding that he may be the holder of fully paid-up shares; or the company may have no
assets at all; or the company may have no surplus assets left for distribution among the shareholders
after the payment of its liabilities.

Registrar (272(d)):
The Registrar is allowed to present a petition for winding up only on the following grounds;

1. Company acting against the security of the country etc.

2. Where the affairs of the company have been conducted fraudulently

3. Non-filing of financial statements or annual returns by the company

The Registrar shall obtain the previous approval of the Central Government before making a petition
for winding up. Further, the Central Government shall not grant the approval to the Registrar unless
the company has been given a reasonable opportunity of making representations.

The Central Government or a State Government (272 (e) and (f)):

Any person authorised by the central government or, if the petition is made on the ground that the
company has acted against the interests of the sovereignty and integrity of India; or the security of
the State; or friendly relations with foreign States; or public order; or decency; or morality.

A copy of every petition made to the Tribunal for winding up of a company shall also be filed with the
Registrar. Within 60 days of receipt of petition, the Registrar shall submit his views to the Tribunal.
Every petition shall be filed according to Form No. NCLT. 1. Other attachments are to be accompanied
in Form No. NCLT. 2. The verification of the same has to be done according to an affidavit under Form
No. NCLT. 6.

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